InfoBytes, July 3, 2008
Sign up for weekly updates
RSS feed
Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- Credit Cards
Federal Issues
FDIC Issues Guidance on HELOC Suspensions and Reductions. On June 26, the Federal Deposit Insurance Corporation (FDIC) issued guidance reminding financial institutions that reductions or suspensions of home equity lines of credit (HELOCs) must comply with legal requirements designed to protect consumers. The letter, titled “Consumer Protection and Risk Management Considerations When Reducing or Suspending Home Equity Lines of Credit and Suggested Best Practices for Working with Borrowers,” noted that the modification of HELOCs is subject to regulations under the Truth in Lending Act, the Federal Trade Commission Act, the Equal Credit Opportunity Act and the Fair Housing Act to ensure adequate consumer protection. The FDIC letterurges compliance with these laws and the establishment of industry-wide best practices for working with borrowers who may experience financial hardship or inconvenience as a result of a reduction or a suspension of a HELOC. For more information on the letter, please see http://www.fdic.gov/news/news/financial/2008/fil08058a.html.
FDIC Issues Letter Regarding Policies and Procedures for Other Real Estate. On July 1, the Federal Deposit Insurance Corporation (FDIC) issued a letter emphasizing the importance of sound policies and procedures in connection with other real estate (ORE). The letter, titled “Guidance on Other Real Estate,” addresses, among other items, the need to comply with requirements for obtaining initial and updated valuations for ORE, the importance of maintaining ORE to prevent asset deterioration, and the importance of reporting and accounting standards for ORE during acquisition, as well as during holding and disposition periods. For more information on the letter, please see http://www.fdic.gov/news/news/financial/2008/fil08062a.html.
OCC Releases 2007 Booklet on Permissible Activities for National Banks. In June, the Office of the Comptroller of Currency (OCC) issued the Activities Permissible for a National Bank booklet for 2007. The booklet contains several updates on general activities that are permissible for national banks, including updates on margin loans, private ratings, the Bank Merger Act, daily netting requirements, the Custody Trust Ledger Deposit Account Program, and investments. For the complete booklet, please see http://www.occ.treas.gov/corpapps/bankact.pdf. Federal Grand Jury Indicts Mortgage Fraud Scheme Participants. On June 26, an Ohio federal grand jury indicted six defendants in connection with alleged mortgage fraud activities. In part, the indictment claims that the defendants purchased low income or otherwise depressed residential properties at artificially inflated prices financed with $15 million in mortgage loans obtained through 33 separate lending institutions. For a copy of the press release, please see http://cincinnati.fbi.gov/doj/pressrel/2008/ci062608.htm.
State Issues
Florida Attorney General Sues Countrywide Financial. On June 30, Florida Attorney General Bill McCollum filed suit against Countrywide Financial Corporation for allegedly engaging in deceptive and unfair trade practices in violation of Florida law. The complaint claims, among other things, that Countrywide violated Florida’s Deceptive and Unfair Trade Practices Act by (i) making representations to borrowers that the approval and closing of the borrower’s subprime loan, either expressly or impliedly, confirmed that the borrower was able to repay the loan, and (ii) making misrepresentations to investors who purchased mortgage backed securities issued by Countrywide that the underwriting and approval of subprime loans confirmed, either expressly or impliedly, that borrowers were able to repay their loans. To this end, the complaint alleges that Countrywide originated subprime loans to borrowers who they knew were not qualified for, and who could not afford, the loans, and originated higher-interest subprime loans to borrowers who qualified for lower prime rates. The complaint further accuses Countrywide of making material misrepresentations with regard to ARMs and other subprime mortgages by alleging that Countrywide employed low “teaser” rates without making further disclosures. Angelo Mozilo, Countrywide’s Chief Executive Officer, is also named as a defendant in the suit. For a copy of the complaint, please see http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7G5G7L/$file/CountrywideComplaint.pdf.
Arizona Senate Passes SB1028, Requiring Loan Originator Licensure. On June 26, the Arizona Senate passed S.B. 1028, which, most notably, would require the licensure of loan originators pursuant to certain education and examination requirements. Under the bill, loan originator applicants would be required to complete an approved course of study and pass an accompanying examination within a year of the time of application. The bill waives the educational requirement for persons with three years of loan originator experience immediately preceding a loan originator application. Further, licensed loan originators must annually complete six units of continuing education requirements. The bill has not yet been signed by the Governor. The proposed legislation would take effect on January 1, 2010. For a copy of the bill, please see http://www.azleg.gov/legtext/48leg/2r/bills/sb1028h.pdf.
Courts
National Bank Act Protects National Bank from Investigation Demand Preceding Conversion to National Bank, But Does Not Protect Non-Subsidiary Agent of Bank. On June 26, a federal district court in West Virginia held that the National Bank Act (NBA) prevents the West Virginia Attorney General from investigating the credit card practices of Capital One Bank, a national bank, but not Capital One Services, Inc. (COSI), a Delaware corporation and “duly authorized agent” of Capital One Bank that conducts various services relating to Capital One Bank’s credit card practices.Capital One Bank (USA), N.A. v. McGraw, No. 08-00165, 2008 WL 2554962 (S.D.W.Va. June 26, 2008). This case arose in 2005 when the West Virginia Attorney General subpoenaed Capital One Bank, at the time a state-chartered bank and not a national bank, and COSI demanding inspection of books and records to investigate the entities’ credit card lending practices. Nearly two years later, the state Circuit Court denied Capital One Bank’s motions to dismiss and granted the AG’s petitions to enforce the subpoenas. After appealing to the state Supreme Court of Appeals, Capital One Bank converted to a national bank, and sought to dismiss the subpoenas against both entities on the grounds that (i) the AG is exercising visitorial powers over a national bank in contravention of the NBA, and (ii) investigating COSI hampers the federally authorized activities of a national bank. Relying heavily on the U.S. Supreme Court’s decision in Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007) (reported in InfoBytes Special Alert, April 17, 2007) and the Second Circuit Court of Appeals’ decision in Clearing House Ass’n. v. Cuomo, 510 F.3d 105 (2d Cir. 2007) (reported in InfoBytes for December 7, 2007), both of which upheld the NBA against attempted visitorial powers over national banks by state agencies, the court stated that issuing a subpoena to investigate the credit card activities of a national bank was an attempt to supervise activities authorized by federal law, and thus constituted an impermissible visitation under the NBA. The court also rejected the argument that the AG should be permitted to investigate the activities of Capital One Bank before it became a national bank, stating that this reasoning would create a special rule allowing states to undermine the visitorial exclusivity of the NBA wherein national banks would “forever be subject to dual regulation as to activities predating their conversion.” Regarding COSI, Capital One Bank alleged that COSI—which is a subsidiary of the same parent holding company of Capital One Bank, but not a subsidiary of Capital One Bank itself— conducts Capital One Bank’s national banking functions as a “duly authorized agent” of Capital One Bank, and, as such, is protected by the reach of the NBA. The court disagreed. Again surveying Watters, the court stated that if it extended the protections of the NBA to “third-party corporations such as COSI, the term ‘national bank’ would no longer mean ‘national bank.’ Rather, it would mean ‘national bank and any entity that can find a way to graft itself, remora-like, to a national bank.’” Consequently, the court held that the NBA does not protect COSI from the state’s investigation regarding its credit card practices. Finally, the court rejected Capital One Bank’s claims under 42 U.S.C. § 1983 (the Civil Rights Act of 1871) that the NBA confers a right to be free from unlawful visitation, stating that Congress, in passing the NBA, intended to balance the authority of the federal government against state rights, and did not grant federal rights to national banks.For a copy of this decision, please see http://www.buckleykolar.com/documents/CapitalOnevMcGraw.pdf.
Oregon Court Applies Safeco in Insurance Adverse Action Case. In a decision interpreting the Fair Credit Reporting Act’s (FCRA) adverse action provisions as they apply to insurers, the U.S. District Court for the District of Oregon rendered a split decision on whether the insurers’ notices complied with FCRA.Ashby v. Farmers Ins. Co. of Oregon, 2008 WL 2557982, No. 01-CV-1446-BR (D. Ore. June 20, 2008). The court first rejected the insurance company’s claim that the repeal of the private right of action for adverse action notices by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) applied to this case, holding that the repeal did not apply retroactively to cases that accrued before the effective date of FACTA. Next, the court held that the insurers’ interpretation of which applicants for new insurance were entitled to adverse action notices was inconsistent with FCRA, as interpreted by the Supreme Court in Safeco Insurance Co. v. Burr, 127 S. Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), because it would have resulted in only those consumers with the worst credit records receiving notices. Nevertheless, the court held that the insurers had not willfully violated FCRA, subjecting them to statutory or punitive damages, because, as in Safeco, their interpretation of the law was not “objectively unreasonable.” The court held that the insurers took adverse action against several of the plaintiffs when it increased their rates on renewal based on information in their credit reports. It held that the wording of the notices provided to those consumers did not comply with FCRA because the insurers “consistently chose not to identify that an adverse action had been taken based in whole or in part on information in a credit report or otherwise to state specifically the consequences of the adverse action.” The court held that the insurer’s interpretation that the language of the notices complied was objectively unreasonable under the Safeco standard, but whether their practices amounted to a “willful” violation, was a question for the jury. Finally, the court applied portions of the holding of the U.S. Court of Appeals for the Ninth Circuit in Reynolds v. Hartford Financial Services Group, 435 F.3d 1081 (9th Cir. 2006) (reported in InfoBytes for January 27, 2006), that were not affected by Safeco, to hold that any company that participates in underwriting the policy can be liable even if it does not have a direct relationship with the consumer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FarmersInsurance.pdf.
Indiana Court Affirms Decision to Vacate Credit Card Arbitration Award. On June 12, an Indiana appellate court affirmed the denial of an arbitration award against a credit card holder, holding that the arbitrator should not have entered an award while the card holder’s objection to jurisdiction was pending. MBNA America Bank, N.A. v. Kay, 888 N.E.2d 288 (Ind. Ct. App. 2008). The case arose when a credit card company submitted a payment dispute matter to the National Arbitration Forum (NAF). The card holder filed an objection to arbitration citing, in part, that he never agreed to submit to the jurisdiction of the NAF. The NAF arbitrator entered an award in favor of the credit card company. However, an Indiana trial court vacated that decision with prejudice. Affirming the trial court’s decision, the Indiana appellate court held that a court must determine whether a valid arbitration agreement exists once a party objects to arbitration under the Federal Arbitration Act. The appellate court further held that the trial court was within its authority to determine whether there was a valid arbitration agreement and which party would be responsible for correcting any inaccuracies resulting from the arbitration award. For a copy of the opinion, please see http://www.in.gov/judiciary/opinions/pdf/06120803bbs.pdf.
Seventh Circuit Upholds FCRA “Firm Offer.” The U.S. Court of Appeals, relying heavily on its opinion in Murray v. New Cingular Wireless Services, 523 F.3d 719 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008), held that a solicitation was a valid “firm offer” under the Fair Credit Reporting Act (FCRA). Cavin v. Home Loan Center, Inc., – F. 3d –, 2008 WL 2600794 (7th Cir. July 2, 2008). The court rejected the consumers’ arguments that (i) the offer letter did not include all material terms of the offer (the court noted that “the proper inquiry in ascertaining whether a letter is a firm offer is whether the offer will be honored, not whether all of the material terms are listed”), (ii) “language such as ‘not all applicants will be approved,’ ‘terms and conditions apply,’ and ‘rates are subject to change without notice,’” indicated that the offer was not a firm offer (the court noted that the language might simply reflect conditions that are permitted by FCRA), (iii) language indicating that the letter was not an offer to enter into a lock-in agreement meant that the offer was not a firm offer (the court stated that the language was designed to comply with a Minnesota state law and did not invalidate the offer), (iv) the purportedly small number of consumers who accepted the offer indicates that it was invalid (the court noted that it is common for a small proportion of consumers to respond), and (v) the offer did not have value to the consumers (the court noted, citing Murray v. New Cingular, that the “value” test articulated in Cole v. U.S. Capital, Inc., 389 F.3d 719, 728 (7th Cir. 2004), only applies when a letter offers other products in addition to credit). For a copy of the opinion, please see http://www.buckleykolar.com/documents/CavinvHomeLoan.pdf.
Firm News
Joseph Kolar spoke at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation was on “The New Structure of the Mortgage Lending Industry.”
Richard DiSalvo spoke at the American Conference Institute’s conference on Prepaid Card Compliance in Washington, D.C. on June 17. Mr. DiSalvo discussed the escheatment of stored value and other prepaid cards. For more information, please see http://www.americanconference.com/prepaidcard.htm.
Miscellany
NAACP Calls National “Day of Action” Against Mortgage Discrimination. On July 2, NAACP units across the country participated in a national “Day of Action” against discriminatory mortgage lending by demanding that several of the nation’s top lenders make amends for discriminating against African American borrowers and eliminate discriminatory polices and practices. The NAACP filed a class action lawsuit against 17 of the nation’s largest lenders last July alleging discriminatory lending practices. For a copy of the press release, please see http://www.naacp.org/news/press/2008-07-02/index.htm.
Bank of America Completes Acquisition of Countrywide. Bank of America Corp.’s acquisition of Countrywide Financial Corp. was finalized on July 1, making Bank of America now the nation’s top originator and servicer of home loans. Please see http://about.countrywide.com/About/About.aspx.
Mortgages
Florida Attorney General Sues Countrywide Financial. On June 30, Florida Attorney General Bill McCollum filed suit against Countrywide Financial Corporation for allegedly engaging in deceptive and unfair trade practices in violation of Florida law. The complaint claims, among other things, that Countrywide violated Florida’s Deceptive and Unfair Trade Practices Act by (i) making representations to borrowers that the approval and closing of the borrower’s subprime loan, either expressly or impliedly, confirmed that the borrower was able to repay the loan, and (ii) making misrepresentations to investors who purchased mortgage backed securities issued by Countrywide that the underwriting and approval of subprime loans confirmed, either expressly or impliedly, that borrowers were able to repay their loans. To this end, the complaint alleges that Countrywide originated subprime loans to borrowers who they knew were not qualified for, and who could not afford, the loans, and originated higher-interest subprime loans to borrowers who qualified for lower prime rates. The complaint further accuses Countrywide of making material misrepresentations with regard to ARMs and other subprime mortgages by alleging that Countrywide employed low “teaser” rates without making further disclosures. Angelo Mozilo, Countrywide’s Chief Executive Officer, is also named as a defendant in the suit. For a copy of the complaint, please see http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7G5G7L/$file/CountrywideComplaint.pdf.
Arizona Senate Passes SB1028, Requiring Loan Originator Licensure. On June 26, the Arizona Senate passed S.B. 1028, which, most notably, would require the licensure of loan originators pursuant to certain education and examination requirements. Under the bill, loan originator applicants would be required to complete an approved course of study and pass an accompanying examination within a year of the time of application. The bill waives the educational requirement for persons with three years of loan originator experience immediately preceding a loan originator application. Further, licensed loan originators must annually complete six units of continuing education requirements. The bill has not yet been signed by the Governor. The proposed legislation would take effect on January 1, 2010. For a copy of the bill, please see http://www.azleg.gov/legtext/48leg/2r/bills/sb1028h.pdf.
Federal Grand Jury Indicts Mortgage Fraud Scheme Participants. On June 26, an Ohio federal grand jury indicted six defendants in connection with alleged mortgage fraud activities. In part, the indictment claims that the defendants purchased low income or otherwise depressed residential properties at artificially inflated prices financed with $15 million in mortgage loans obtained through 33 separate lending institutions. For a copy of the press release, please see http://cincinnati.fbi.gov/doj/pressrel/2008/ci062608.htm.
NAACP Calls National “Day of Action” Against Mortgage Discrimination. On July 2, NAACP units across the country participated in a national “Day of Action” against discriminatory mortgage lending by demanding that several of the nation’s top lenders make amends for discriminating against African American borrowers and eliminate discriminatory polices and practices. The NAACP filed a class action lawsuit against 17 of the nation’s largest lenders last July alleging discriminatory lending practices. For a copy of the press release, please see http://www.naacp.org/news/press/2008-07-02/index.htm.
Bank of America Completes Acquisition of Countrywide. Bank of America Corp.’s acquisition of Countrywide Financial Corp. was finalized on July 1, making Bank of America now the nation’s top originator and servicer of home loans. Please see http://about.countrywide.com/About/About.aspx.
Banking
FDIC Issues Guidance on HELOC Suspensions and Reductions. On June 26, the Federal Deposit Insurance Corporation (FDIC) issued guidance reminding financial institutions that reductions or suspensions of home equity lines of credit (HELOCs) must comply with legal requirements designed to protect consumers. The letter, titled “Consumer Protection and Risk Management Considerations When Reducing or Suspending Home Equity Lines of Credit and Suggested Best Practices for Working with Borrowers,” noted that the modification of HELOCs is subject to regulations under the Truth in Lending Act, the Federal Trade Commission Act, the Equal Credit Opportunity Act and the Fair Housing Act to ensure adequate consumer protection. The FDIC letterurges compliance with these laws and the establishment of industry-wide best practices for working with borrowers who may experience financial hardship or inconvenience as a result of a reduction or a suspension of a HELOC. For more information on the letter, please see http://www.fdic.gov/news/news/financial/2008/fil08058a.html.
FDIC Issues Letter Regarding Policies and Procedures for Other Real Estate. On July 1, the Federal Deposit Insurance Corporation (FDIC) issued a letter emphasizing the importance of sound policies and procedures in connection with other real estate (ORE). The letter, titled “Guidance on Other Real Estate,” addresses, among other items, the need to comply with requirements for obtaining initial and updated valuations for ORE, the importance of maintaining ORE to prevent asset deterioration, and the importance of reporting and accounting standards for ORE during acquisition, as well as during holding and disposition periods. For more information on the letter, please see http://www.fdic.gov/news/news/financial/2008/fil08062a.html.
OCC Releases 2007 Booklet on Permissible Activities for National Banks. In June, the Office of the Comptroller of Currency (OCC) issued the Activities Permissible for a National Bank booklet for 2007. The booklet contains several updates on general activities that are permissible for national banks, including updates on margin loans, private ratings, the Bank Merger Act, daily netting requirements, the Custody Trust Ledger Deposit Account Program, and investments. For the complete booklet, please see http://www.occ.treas.gov/corpapps/bankact.pdf.
National Bank Act Protects National Bank from Investigation Demand Preceding Conversion to National Bank, But Does Not Protect Non-Subsidiary Agent of Bank. On June 26, a federal district court in West Virginia held that the National Bank Act (NBA) prevents the West Virginia Attorney General from investigating the credit card practices of Capital One Bank, a national bank, but not Capital One Services, Inc. (COSI), a Delaware corporation and “duly authorized agent” of Capital One Bank that conducts various services relating to Capital One Bank’s credit card practices.Capital One Bank (USA), N.A. v. McGraw, No. 08-00165, 2008 WL 2554962 (S.D.W.Va. June 26, 2008). This case arose in 2005 when the West Virginia Attorney General subpoenaed Capital One Bank, at the time a state-chartered bank and not a national bank, and COSI demanding inspection of books and records to investigate the entities’ credit card lending practices. Nearly two years later, the state Circuit Court denied Capital One Bank’s motions to dismiss and granted the AG’s petitions to enforce the subpoenas. After appealing to the state Supreme Court of Appeals, Capital One Bank converted to a national bank, and sought to dismiss the subpoenas against both entities on the grounds that (i) the AG is exercising visitorial powers over a national bank in contravention of the NBA, and (ii) investigating COSI hampers the federally authorized activities of a national bank. Relying heavily on the U.S. Supreme Court’s decision in Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007) (reported in InfoBytes Special Alert, April 17, 2007) and the Second Circuit Court of Appeals’ decision in Clearing House Ass’n. v. Cuomo, 510 F.3d 105 (2d Cir. 2007) (reported in InfoBytes for December 7, 2007), both of which upheld the NBA against attempted visitorial powers over national banks by state agencies, the court stated that issuing a subpoena to investigate the credit card activities of a national bank was an attempt to supervise activities authorized by federal law, and thus constituted an impermissible visitation under the NBA. The court also rejected the argument that the AG should be permitted to investigate the activities of Capital One Bank before it became a national bank, stating that this reasoning would create a special rule allowing states to undermine the visitorial exclusivity of the NBA wherein national banks would “forever be subject to dual regulation as to activities predating their conversion.” Regarding COSI, Capital One Bank alleged that COSI—which is a subsidiary of the same parent holding company of Capital One Bank, but not a subsidiary of Capital One Bank itself— conducts Capital One Bank’s national banking functions as a “duly authorized agent” of Capital One Bank, and, as such, is protected by the reach of the NBA. The court disagreed. Again surveying Watters, the court stated that if it extended the protections of the NBA to “third-party corporations such as COSI, the term ‘national bank’ would no longer mean ‘national bank.’ Rather, it would mean ‘national bank and any entity that can find a way to graft itself, remora-like, to a national bank.’” Consequently, the court held that the NBA does not protect COSI from the state’s investigation regarding its credit card practices. Finally, the court rejected Capital One Bank’s claims under 42 U.S.C. § 1983 (the Civil Rights Act of 1871) that the NBA confers a right to be free from unlawful visitation, stating that Congress, in passing the NBA, intended to balance the authority of the federal government against state rights, and did not grant federal rights to national banks.For a copy of this decision, please see http://www.buckleykolar.com/documents/CapitalOnevMcGraw.pdf.
Consumer Finance
Indiana Court Affirms Decision to Vacate Credit Card Arbitration Award. On June 12, an Indiana appellate court affirmed the denial of an arbitration award against a credit card holder, holding that the arbitrator should not have entered an award while the card holder’s objection to jurisdiction was pending. MBNA America Bank, N.A. v. Kay, 888 N.E.2d 288 (Ind. Ct. App. 2008). The case arose when a credit card company submitted a payment dispute matter to the National Arbitration Forum (NAF). The card holder filed an objection to arbitration citing, in part, that he never agreed to submit to the jurisdiction of the NAF. The NAF arbitrator entered an award in favor of the credit card company. However, an Indiana trial court vacated that decision with prejudice. Affirming the trial court’s decision, the Indiana appellate court held that a court must determine whether a valid arbitration agreement exists once a party objects to arbitration under the Federal Arbitration Act. The appellate court further held that the trial court was within its authority to determine whether there was a valid arbitration agreement and which party would be responsible for correcting any inaccuracies resulting from the arbitration award. For a copy of the opinion, please see http://www.in.gov/judiciary/opinions/pdf/06120803bbs.pdf.
Seventh Circuit Upholds FCRA “Firm Offer.” The U.S. Court of Appeals, relying heavily on its opinion in Murray v. New Cingular Wireless Services, 523 F.3d 719 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008), held that a solicitation was a valid “firm offer” under the Fair Credit Reporting Act (FCRA). Cavin v. Home Loan Center, Inc., – F. 3d –, 2008 WL 2600794 (7th Cir. July 2, 2008). The court rejected the consumers’ arguments that (i) the offer letter did not include all material terms of the offer (the court noted that “the proper inquiry in ascertaining whether a letter is a firm offer is whether the offer will be honored, not whether all of the material terms are listed”), (ii) “language such as ‘not all applicants will be approved,’ ‘terms and conditions apply,’ and ‘rates are subject to change without notice,’” indicated that the offer was not a firm offer (the court noted that the language might simply reflect conditions that are permitted by FCRA), (iii) language indicating that the letter was not an offer to enter into a lock-in agreement meant that the offer was not a firm offer (the court stated that the language was designed to comply with a Minnesota state law and did not invalidate the offer), (iv) the purportedly small number of consumers who accepted the offer indicates that it was invalid (the court noted that it is common for a small proportion of consumers to respond), and (v) the offer did not have value to the consumers (the court noted, citing Murray v. New Cingular, that the “value” test articulated in Cole v. U.S. Capital, Inc., 389 F.3d 719, 728 (7th Cir. 2004), only applies when a letter offers other products in addition to credit). For a copy of the opinion, please see http://www.buckleykolar.com/documents/CavinvHomeLoan.pdf.
Insurance
Oregon Court Applies Safeco in Insurance Adverse Action Case. In a decision interpreting the Fair Credit Reporting Act’s (FCRA) adverse action provisions as they apply to insurers, the U.S. District Court for the District of Oregon rendered a split decision on whether the insurers’ notices complied with FCRA.Ashby v. Farmers Ins. Co. of Oregon, 2008 WL 2557982, No. 01-CV-1446-BR (D. Ore. June 20, 2008). The court first rejected the insurance company’s claim that the repeal of the private right of action for adverse action notices by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) applied to this case, holding that the repeal did not apply retroactively to cases that accrued before the effective date of FACTA. Next, the court held that the insurers’ interpretation of which applicants for new insurance were entitled to adverse action notices was inconsistent with FCRA, as interpreted by the Supreme Court in Safeco Insurance Co. v. Burr, 127 S. Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), because it would have resulted in only those consumers with the worst credit records receiving notices. Nevertheless, the court held that the insurers had not willfully violated FCRA, subjecting them to statutory or punitive damages, because, as in Safeco, their interpretation of the law was not “objectively unreasonable.” The court held that the insurers took adverse action against several of the plaintiffs when it increased their rates on renewal based on information in their credit reports. It held that the wording of the notices provided to those consumers did not comply with FCRA because the insurers “consistently chose not to identify that an adverse action had been taken based in whole or in part on information in a credit report or otherwise to state specifically the consequences of the adverse action.” The court held that the insurer’s interpretation that the language of the notices complied was objectively unreasonable under the Safeco standard, but whether their practices amounted to a “willful” violation, was a question for the jury. Finally, the court applied portions of the holding of the U.S. Court of Appeals for the Ninth Circuit in Reynolds v. Hartford Financial Services Group, 435 F.3d 1081 (9th Cir. 2006) (reported in InfoBytes for January 27, 2006), that were not affected by Safeco, to hold that any company that participates in underwriting the policy can be liable even if it does not have a direct relationship with the consumer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FarmersInsurance.pdf.
Litigation
National Bank Act Protects National Bank from Investigation Demand Preceding Conversion to National Bank, But Does Not Protect Non-Subsidiary Agent of Bank. On June 26, a federal district court in West Virginia held that the National Bank Act (NBA) prevents the West Virginia Attorney General from investigating the credit card practices of Capital One Bank, a national bank, but not Capital One Services, Inc. (COSI), a Delaware corporation and “duly authorized agent” of Capital One Bank that conducts various services relating to Capital One Bank’s credit card practices.Capital One Bank (USA), N.A. v. McGraw, No. 08-00165, 2008 WL 2554962 (S.D.W.Va. June 26, 2008). This case arose in 2005 when the West Virginia Attorney General subpoenaed Capital One Bank, at the time a state-chartered bank and not a national bank, and COSI demanding inspection of books and records to investigate the entities’ credit card lending practices. Nearly two years later, the state Circuit Court denied Capital One Bank’s motions to dismiss and granted the AG’s petitions to enforce the subpoenas. After appealing to the state Supreme Court of Appeals, Capital One Bank converted to a national bank, and sought to dismiss the subpoenas against both entities on the grounds that (i) the AG is exercising visitorial powers over a national bank in contravention of the NBA, and (ii) investigating COSI hampers the federally authorized activities of a national bank. Relying heavily on the U.S. Supreme Court’s decision in Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007) (reported in InfoBytes Special Alert, April 17, 2007) and the Second Circuit Court of Appeals’ decision in Clearing House Ass’n. v. Cuomo, 510 F.3d 105 (2d Cir. 2007) (reported in InfoBytes for December 7, 2007), both of which upheld the NBA against attempted visitorial powers over national banks by state agencies, the court stated that issuing a subpoena to investigate the credit card activities of a national bank was an attempt to supervise activities authorized by federal law, and thus constituted an impermissible visitation under the NBA. The court also rejected the argument that the AG should be permitted to investigate the activities of Capital One Bank before it became a national bank, stating that this reasoning would create a special rule allowing states to undermine the visitorial exclusivity of the NBA wherein national banks would “forever be subject to dual regulation as to activities predating their conversion.” Regarding COSI, Capital One Bank alleged that COSI—which is a subsidiary of the same parent holding company of Capital One Bank, but not a subsidiary of Capital One Bank itself— conducts Capital One Bank’s national banking functions as a “duly authorized agent” of Capital One Bank, and, as such, is protected by the reach of the NBA. The court disagreed. Again surveying Watters, the court stated that if it extended the protections of the NBA to “third-party corporations such as COSI, the term ‘national bank’ would no longer mean ‘national bank.’ Rather, it would mean ‘national bank and any entity that can find a way to graft itself, remora-like, to a national bank.’” Consequently, the court held that the NBA does not protect COSI from the state’s investigation regarding its credit card practices. Finally, the court rejected Capital One Bank’s claims under 42 U.S.C. § 1983 (the Civil Rights Act of 1871) that the NBA confers a right to be free from unlawful visitation, stating that Congress, in passing the NBA, intended to balance the authority of the federal government against state rights, and did not grant federal rights to national banks.For a copy of this decision, please see http://www.buckleykolar.com/documents/CapitalOnevMcGraw.pdf.
Oregon Court Applies Safeco in Insurance Adverse Action Case. In a decision interpreting the Fair Credit Reporting Act’s (FCRA) adverse action provisions as they apply to insurers, the U.S. District Court for the District of Oregon rendered a split decision on whether the insurers’ notices complied with FCRA.Ashby v. Farmers Ins. Co. of Oregon, 2008 WL 2557982, No. 01-CV-1446-BR (D. Ore. June 20, 2008). The court first rejected the insurance company’s claim that the repeal of the private right of action for adverse action notices by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) applied to this case, holding that the repeal did not apply retroactively to cases that accrued before the effective date of FACTA. Next, the court held that the insurers’ interpretation of which applicants for new insurance were entitled to adverse action notices was inconsistent with FCRA, as interpreted by the Supreme Court in Safeco Insurance Co. v. Burr, 127 S. Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), because it would have resulted in only those consumers with the worst credit records receiving notices. Nevertheless, the court held that the insurers had not willfully violated FCRA, subjecting them to statutory or punitive damages, because, as in Safeco, their interpretation of the law was not “objectively unreasonable.” The court held that the insurers took adverse action against several of the plaintiffs when it increased their rates on renewal based on information in their credit reports. It held that the wording of the notices provided to those consumers did not comply with FCRA because the insurers “consistently chose not to identify that an adverse action had been taken based in whole or in part on information in a credit report or otherwise to state specifically the consequences of the adverse action.” The court held that the insurer’s interpretation that the language of the notices complied was objectively unreasonable under the Safeco standard, but whether their practices amounted to a “willful” violation, was a question for the jury. Finally, the court applied portions of the holding of the U.S. Court of Appeals for the Ninth Circuit in Reynolds v. Hartford Financial Services Group, 435 F.3d 1081 (9th Cir. 2006) (reported in InfoBytes for January 27, 2006), that were not affected by Safeco, to hold that any company that participates in underwriting the policy can be liable even if it does not have a direct relationship with the consumer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FarmersInsurance.pdf.
Indiana Court Affirms Decision to Vacate Credit Card Arbitration Award. On June 12, an Indiana appellate court affirmed the denial of an arbitration award against a credit card holder, holding that the arbitrator should not have entered an award while the card holder’s objection to jurisdiction was pending. MBNA America Bank, N.A. v. Kay, 888 N.E.2d 288 (Ind. Ct. App. 2008). The case arose when a credit card company submitted a payment dispute matter to the National Arbitration Forum (NAF). The card holder filed an objection to arbitration citing, in part, that he never agreed to submit to the jurisdiction of the NAF. The NAF arbitrator entered an award in favor of the credit card company. However, an Indiana trial court vacated that decision with prejudice. Affirming the trial court’s decision, the Indiana appellate court held that a court must determine whether a valid arbitration agreement exists once a party objects to arbitration under the Federal Arbitration Act. The appellate court further held that the trial court was within its authority to determine whether there was a valid arbitration agreement and which party would be responsible for correcting any inaccuracies resulting from the arbitration award. For a copy of the opinion, please see http://www.in.gov/judiciary/opinions/pdf/06120803bbs.pdf.
Seventh Circuit Upholds FCRA “Firm Offer.” The U.S. Court of Appeals, relying heavily on its opinion in Murray v. New Cingular Wireless Services, 523 F.3d 719 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008), held that a solicitation was a valid “firm offer” under the Fair Credit Reporting Act (FCRA). Cavin v. Home Loan Center, Inc., – F. 3d –, 2008 WL 2600794 (7th Cir. July 2, 2008). The court rejected the consumers’ arguments that (i) the offer letter did not include all material terms of the offer (the court noted that “the proper inquiry in ascertaining whether a letter is a firm offer is whether the offer will be honored, not whether all of the material terms are listed”), (ii) “language such as ‘not all applicants will be approved,’ ‘terms and conditions apply,’ and ‘rates are subject to change without notice,’” indicated that the offer was not a firm offer (the court noted that the language might simply reflect conditions that are permitted by FCRA), (iii) language indicating that the letter was not an offer to enter into a lock-in agreement meant that the offer was not a firm offer (the court stated that the language was designed to comply with a Minnesota state law and did not invalidate the offer), (iv) the purportedly small number of consumers who accepted the offer indicates that it was invalid (the court noted that it is common for a small proportion of consumers to respond), and (v) the offer did not have value to the consumers (the court noted, citing Murray v. New Cingular, that the “value” test articulated in Cole v. U.S. Capital, Inc., 389 F.3d 719, 728 (7th Cir. 2004), only applies when a letter offers other products in addition to credit). For a copy of the opinion, please see http://www.buckleykolar.com/documents/CavinvHomeLoan.pdf.
Credit Cards
National Bank Act Protects National Bank from Investigation Demand Preceding Conversion to National Bank, But Does Not Protect Non-Subsidiary Agent of Bank. On June 26, a federal district court in West Virginia held that the National Bank Act (NBA) prevents the West Virginia Attorney General from investigating the credit card practices of Capital One Bank, a national bank, but not Capital One Services, Inc. (COSI), a Delaware corporation and “duly authorized agent” of Capital One Bank that conducts various services relating to Capital One Bank’s credit card practices.Capital One Bank (USA), N.A. v. McGraw, No. 08-00165, 2008 WL 2554962 (S.D.W.Va. June 26, 2008). This case arose in 2005 when the West Virginia Attorney General subpoenaed Capital One Bank, at the time a state-chartered bank and not a national bank, and COSI demanding inspection of books and records to investigate the entities’ credit card lending practices. Nearly two years later, the state Circuit Court denied Capital One Bank’s motions to dismiss and granted the AG’s petitions to enforce the subpoenas. After appealing to the state Supreme Court of Appeals, Capital One Bank converted to a national bank, and sought to dismiss the subpoenas against both entities on the grounds that (i) the AG is exercising visitorial powers over a national bank in contravention of the NBA, and (ii) investigating COSI hampers the federally authorized activities of a national bank. Relying heavily on the U.S. Supreme Court’s decision in Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007) (reported in InfoBytes Special Alert, April 17, 2007) and the Second Circuit Court of Appeals’ decision in Clearing House Ass’n. v. Cuomo, 510 F.3d 105 (2d Cir. 2007) (reported in InfoBytes for December 7, 2007), both of which upheld the NBA against attempted visitorial powers over national banks by state agencies, the court stated that issuing a subpoena to investigate the credit card activities of a national bank was an attempt to supervise activities authorized by federal law, and thus constituted an impermissible visitation under the NBA. The court also rejected the argument that the AG should be permitted to investigate the activities of Capital One Bank before it became a national bank, stating that this reasoning would create a special rule allowing states to undermine the visitorial exclusivity of the NBA wherein national banks would “forever be subject to dual regulation as to activities predating their conversion.” Regarding COSI, Capital One Bank alleged that COSI—which is a subsidiary of the same parent holding company of Capital One Bank, but not a subsidiary of Capital One Bank itself— conducts Capital One Bank’s national banking functions as a “duly authorized agent” of Capital One Bank, and, as such, is protected by the reach of the NBA. The court disagreed. Again surveying Watters, the court stated that if it extended the protections of the NBA to “third-party corporations such as COSI, the term ‘national bank’ would no longer mean ‘national bank.’ Rather, it would mean ‘national bank and any entity that can find a way to graft itself, remora-like, to a national bank.’” Consequently, the court held that the NBA does not protect COSI from the state’s investigation regarding its credit card practices. Finally, the court rejected Capital One Bank’s claims under 42 U.S.C. § 1983 (the Civil Rights Act of 1871) that the NBA confers a right to be free from unlawful visitation, stating that Congress, in passing the NBA, intended to balance the authority of the federal government against state rights, and did not grant federal rights to national banks.For a copy of this decision, please see http://www.buckleykolar.com/documents/CapitalOnevMcGraw.pdf.